Friday, June 29, 2012

In
its recent decision in Admiral Ins. Co.
v. Adges, 2012 U.S. Dist. LEXIS 89355 (S.D.N.Y. June 27, 2012), the United
States District for the Southern District of New York had occasion to consider
whether a business enterprise exclusion in a legal malpractice policy applied
to bar coverage for an underlying lawsuit.

Admiral
Insurance Company insured Michael Adges under a lawyers’ professional liability
policy. Adges sought coverage under the
policy for an underlying lawsuit naming him as a defendant individually and
under his trade name Silver Lining Realty.
The lawsuit alleged several causes of action, including conversion,
misappropriation, fraud, and deceptive trade practices, relating solely to
Silver Lining Realty’s business.

Admiral’s
policy contained two relevant exclusions.
The first barred coverage for any claim:

E. based
upon, arising out of, directly or indirectly resulting from or in consequence
of, or in any way involving any Insured’s activities or their capacity as:

1. an
officer, director, partner, trustee, or employee of a business enterprise, not
named in Item 1 of the Declarations …

This exclusion E. applies whether or not the Insured’s
activities or capacity also constitute or involve Professional Services.

The
second relevant exclusion applied to claims:

F. by
or in connection with any pre or post formation business enterprise, not named
in Item 1. of the Declarations, in which any Insured owns or owned, or controls
or controlled, more than a 10 percent interest, or in which any Insured is or
was an owner, partner, or employee, or which is directly or indirectly
controlled, operated, or managed by an Insured …

This exclusion F. applies whether or not the Insured’s
activities also constitute or involve Professional Services.

The
court observed that courts in New York, as well as other jurisdictions such as
Pennsylvania, Louisiana, Ohio and Arizona routinely enforce business enterprise
exclusions. The relevant consideration
is whether the insured is being sued in connection with a business enterprise
other than the entity specifically insured under the policy. Finding that the underlying suit related
solely to Silver Lining Realty, and not the insured law practice, the court
concluded that both policy exclusions applied to bar coverage.

Tuesday, June 26, 2012

In
its recent decision in City of Medford v.
Argonaut Ins. Group, 2012 U.S. Dist. LEXIS 86114 (D. Ore. June 21, 2012),
the United States District Court for the District of Oregon had occasion to
consider whether an insurer’s duty to defend includes an obligation to pay for
appellate costs involving non-covered claims.

The
insured, City of Medford, was named as a defendant in two underlying suits
brought by retired and current employees, all of whom alleged that the City
failed to provide health care insurance to retired employees.In the first suit, brought by four retired
employees, the City was sued for age discrimination, statutory violations and
breach of contract.The second suit,
brought by current employees, alleged similar causes of action and also sought
injunctive relief.The City’s employment
practices liability insurer, Northland Insurance Company, provided the City
with a defense in both suits.Both suits
resulted in partial verdicts in favor of the plaintiffs, although for relief
not covered under the Northland policy.The suit brought by the former employees resulted in an award only for breach
of contract.The suit brought by the
current employees resulted only in an award of injunctive relief, requiring the
City to purchase health care insurance that would continue after an employee’s
retirement.

Northland
contended that it had no duty to indemnify the City for the verdicts in both matters,
and the court agreed, observing that the Northland policy had specific
exclusions with respect to breach of contract damages and injunctive
relief.The more complicated issue for
the court was whether Northland had a duty to defend the City in connection
with its own appeal of the two underlying suits.The court acknowledged that there was little
case law guidance on the issue from Oregon courts, although at least one Oregon
court had concluded that the duty to defend can include the duty to defend an appeal.Goddard
ex rel. Estate of Goddard v. Farmers Ins. Co., 22 P.3d 1224 (Ore. App. 2004).The court noted, however, that as a general
proposition, when a complaint is amended and the only potentially covered
causes of action are no longer included in the amended pleading, then the duty
to defend is terminated.National Union Fire Ins. Co. v. Starplex
Corp., 188 P.3d 332 (Ore. App. 2008).The court further cited to a case from a Utah federal district court
holding that “when a judgment eliminates all covered claims against the
insured, and the dismissal of the covered claims is not appealed, the insurer
no longer has a duty to defend.” Crist v.
Insurance Co. of North America, 529 F. Supp. 601 (D. Utah 1982).

From
these lines of cases, the Oregon court concluded that in the absence of covered
or even potentially covered claims, the duty to defend is necessarily eliminated.Because the only successful counts against
the City – for breach of contract and injunctive relief – fell outside of the
policy’s coverage, Northland could have no continuing obligation to defend the
City in connection with further litigation on those particular counts.As such, and because plaintiffs did not
cross-appeal with respect to any of the potentially covered claims on which
they were unsuccessful, the court concluded that Northland had no duty to pay
the City’s costs associated with the appeals.Notably, the court did not take into consideration which party initiated
the appeal, but rather only the substance of the issues on appeal.

Coral
Reef Products was insured under a miscellaneous errors and omissions policy
issued by AXIS.Coral Reef was sued by
the company Primesites for allegedly hacking into Primesites’ customer lists
and soliciting Primesites’ customers. Coral Reef was alleged to have falsely informed
these customers that it was affiliated with Primesites.AXIS’ policy insured Coral Reef for “Insured
Services,” defined, in pertinent part, as “[t]alent consulting including talent
promotion and membership services for others.”The court agreed with Coral Reef that the phrase “membership services”
was ambiguous, and as such, the conduct alleged by Primesites potentially fell
within the policy’s insuring agreement.

The
court nevertheless concluded that coverage was negated by the following
exclusions:

A. The
Company is not obligated to pay Damages or Claim Expenses or defend Claims
for or arising directly or indirectly out of:

* * *

2. An act or omission that a jury, court or
arbitrator finds dishonest, fraudulent, criminal, malicious or was committed
while knowing it was wrongful. This exclusion does not apply to any Individual Insured that did not commit,
acquiesce or participate in the actions that gave rise to the Claim.

* * *

4.
Unfair competition, restraint of trade or any other violation of antitrust
laws.

* * *

6.
Gain, profit or advantage to which any Insured is not legally entitled.

The
court held that these exclusions, in particular A.4 and A.6 applied to allegations
of computer hacking and retrieving and misusing Primesites’ proprietary customer
database.The court explained that “[a]t
a minimum, Primesites’ claims arose directly or indirectly out of the advantage
Coral Reef gained as a competitor of Primesites when, allegedly, it unlawfully
obtained access to Primesites’ Customer Lists and subsequently contacted
Primesites’ customers.”

Tuesday, June 19, 2012

In
its recent decision in Schwartz Manes
Ruby & Slovin, L.P.A. v. Monitor Liability Managers, LLC, 2012 U.S.
App. LEXIS 12236 (6th Cir. June 15, 2012), the United States Court of Appeals
for the Sixth Circuit, applying Ohio law, had occasion to consider the issue of
whether prior to the inception of a policy, the insured reasonably could have
foreseen that a claim would be made.

Schwartz Manes involved coverage for
alleged legal malpractice under a professional liability policy.The Schwartz Manes law firm (“SMRS”)
represented an individual in connection with a property dispute.After having failed to appear at a scheduled
trial in 2005, judgment was entered against SMRS’ client.The client later retained a second firm,
which after reviewing SMRS’ file, wrote SMRS by letter dated June 15, 2008 to
inquire as to why the firm failed to appear at the trial, particularly since
its file contained a notice for the trial.On July 10, 2008, after undertaking an internal investigation, SMRS advised
its insurance agent of a potential claim, but the agent apparently never
forwarded this information to anyone else.On July 24, 2008, Carolina Casualty Insurance Company issued to SMRS a
legal malpractice policy for the period June 29, 2008 to June 29, 2009. SMRS
was later sued for malpractice in January 2009.

The
Carolina policy contained the following insuring agreement:

This Policy shall pay on behalf of the Insured all Damages and
Claims Expense that the Insured shall become legally obligated to pay, arising
from any Claim first made against an Insured during the Policy Period and
reported to the Insurer in writing during the Policy Period or within 60 days
thereafter, for any Wrongful Act, provided that prior to the inception date of
the first Lawyers' Professional Liability Insurance Policy issued by the
Insurer to the Named Insured, which has been continuously renewed and
maintained in effect to the inception of this Policy Period, the Insured did not know, or could not
reasonably foresee that such Wrongful Act might reasonably be expected to be
the basis of a Claim.(Emphasis
supplied.)

Carolina
disclaimed coverage to SMRS on the basis that prior to its policy’s June 29,
2008 date of inception, SMRS knew and reasonably could have foreseen that a
claim would be made relating to its alleged malpractice.On motion for summary judgment, the United
States District Court for the Southern District of Ohio agreed, holding that
SMRS’ knowledge of the potential claim prior to the issuance of the Carolina
policy negated Carolina’s duty to defend or indemnify.

On
appeal, the Sixth Circuit observed that the question of whether SMRS could
reasonably foresee that a Wrongful Act “might reasonably be expected” to be the
basis of a claim required both a subjective and an objective analysis.The subjective part of the analysis inquired
into what facts SMRS knew of prior to the policy’s date of inception.The objective analysis, on the other hand,
inquired into whether a “reasonable insured” in possession of similar facts,
would have expected a claim.

SMRS
argued that the phrase “reasonably be expected” was necessarily ambiguous, and
that it was not clear whether the claim only be a possibility, or whether the
phrase should be interpreted more narrowly to claims that are “probable.”The court concluded that it need not
determine whether the phrase is ambiguous, “because even under a more favorable
interpretation, a reasonable insured would have expected a malpractice claim
…against SMRS to be reasonably probable.”It was the court’s opinion that a reasonable
insured having knowledge of the underlying judgment resulting from SMRS’
failure to appear at the trial, would have realized that a claim was
“reasonably probable.”

As a
secondary argument, SMRS argued that only that aspect of the malpractice claim
relating to its failure to appear at the trial should be precluded.SMRS argued that other aspects of underlying
plaintiff’s claim, such as failure to assert certain defenses, should not be
precluded from coverage SMRS could not have predicted such aspects of the suit
prior to the date of the policy’s inception.The court rejected this argument, finding that there was no way to
meaningfully divorce SMRS’ failure to attend the trial from other aspects of
the alleged malpractice.The court
further held that the policy’s “related wrongful act” language precluded such a
parsing of claims, observing:

… Section IV(K) of the Policy also excludes coverage for
"Related Wrongful Acts." The Policy defines "Related Wrongful
Acts" as "Wrongful Acts which are logically or causally connected by
reason of any common fact, circumstance, situation, transaction, casualty,
event or decision." SMRS's alleged failure to comprehensively research and
litigate Kissel's lawsuit and potential countersuit against her step-mother is
certainly logically connected to its alleged failure to attend her trial in the
same matter.

Sunday, June 17, 2012

In
its recent decision in St. Paul Surplus
Lines Ins. Co. v. Davis Gulf Coast, Inc., 2012 U.S. Dist. LEXIS 81719 (S.D.
Tex. June 13, 2012), the United States District Court for the Southern District
of Texas had occasion to consider the enforceability of a provision requirement
reporting of a pollution condition within ninety (90) days.

The
insured, Davis Gulf Coast, operated an oil and gas lease on Matagorda Island in
Texas.Davis’ general liability policy,
issued by St. Paul, had a pollution exclusion with a sudden and accidental
cleanup cost exception, thus granting coverage for cleanup costs associated
with a “sudden and accidental pollution incident,” defined by the policy as:

Sudden and accidental pollution incident means the discharge,
dispersal, escape, or release of a pollutant that:

• is
sudden and accidental;

• begins
on a specific date and at a specific time while this agreement is in effect;

• is
first known within 30 days of its beginning by you or any of your employees,
your operating agent or any of its employees, or your pumper-gauger or any of
its employees;

• any
protected person, your operating agent, or your pumper-gauger attempts to end
as soon as possible after it first becomes known by you or any of your
employees, your operating agent or any of its employees, or your pumper-gauger
or any of its employees; and

·is
reported to us within 90 days after it first becomes known to you or any of your employees,
your operating agent or any of its employees, or your pumper-gauger or any of
its employees.(Emphasis supplied.)

Thus,
by its express terms, “sudden and accident pollution incident” is defined as a discharge,
dispersal, release, etc. that becomes known to the the insured within thirty
(30) days of its commencement and that it is reported to St. Paul within ninety
(90) days of such knowledge.At issue
before the court was Davis’ reporting of a pollution incident some two hundred
days after it learned of the incident.Davis and St. Paul agreed that this delay was a breach of the ninety-day
reporting requirement.Davis
nevertheless argued that its non-compliance should be excused absent prejudice
to St. Paul.

Applying
Oklahoma law, the court agreed that the timing elements of the definition of
“sudden and accidental pollution incident” (both as to learning of the release and
reporting same) were not generic notice requirements, but instead were “an
integral part of the definition of the risk covered.”The court contrasted this with the notice
provision applicable to the remaining coverages under the policy (i.e., bodily
injury, property damage, and personal and advertising injury), which required
only notice “as soon as possible.”The
court therefore concluded that there was an internally consistency within the
policy of treating the cleanup cost coverage differently than the other risks
covered under the policy, and that it would be improper to rewrite the policy
so as to ignore the ninety (90) day reporting requirement.

More
significantly, the court rejected Davis’ argument that the Oklahoma body of
case law concerning the notice-prejudice rule should be applied.The court observed the ninety-day reporting
requirement for cleanup cost coverage to be more akin to claims made coverage
rather than occurrence-based coverage, and as such, case law concerning the
latter were not relevant.Moreover, the
court found the ninety-day reporting requirement consistent with the risk
offered and the premium charged, explaining:

It is common knowledge that oil and gas pollution clean-up
costs can be enormous, and any comprehensive general liability occurrence
policy with open-ended liability for that risk would undoubtedly carry with it
a commensurately enormous premium. The bargain struck here by Davis and St.
Paul is quite different. Davis acquired insurance only for pollution clean-up
costs arising from a release of a pollutant that is "sudden and
accidental," beginning on a specific date and time, which becomes known to
the insured within 30 days of the release and is reported by the insured to St.
Paul within 90 days after the insured learns of it. Thus, St. Paul by
definition effectively assumed a rolling window of exposure for a maximum of
120 days after the date of any sudden and accidental pollution incident. Concomitantly
the premium for such limited and narrowly-defined pollution clean-up costs, in
the words of Judge Cauthron of the Western District of Oklahoma, would be
"much more reasonable and thus affordable." Id. In sum, the 90 days reporting requirement at issue here is not
a general notice provision that requires the insurer to show prejudice if the
insured does not comply, but rather, in language approved by Oklahoma caselaw,
is "a definition of coverage."

In
its recent decision in Admiral Ins. Co. v
Joy Contractors, Inc., 2012 NY Slip Op 4670 (N.Y. June 12, 2012), the New
York Court of Appeals, New York’s highest court, considered whether a general
liability policy can be rescinded to the detriment of an innocent additional
insured.

Admiral Insurance involved coverage for
liabilities associated with the collapse of a tower crane in Manhattan in March
2008.The collapse resulted in numerous
deaths and injuries, and caused significant property damage as well as the
destruction of an entire building. The
policy’s named insured, Joy Contractors, had been operating the crane at the
time of the collapse.It was insured
under a primary general liability policy issued by Lincoln, and a $9 million
follow-form excess liability policy issued by Admiral.Immediately following the incident, Joy gave
notice to both Lincoln and to Admiral.Several entities, including the project’s general contractor and the
building’s owner, qualified as additional insureds under Joy’s policies.

Admiral
initially issued a reservation of rights with respect to several grounds.Included among these grounds was the right to
rescind its policy on the basis that Joy had represented in its application
that it specialized in drywall installation, that it did not perform building
exterior work.Admiral later denied coverage
to Joy, and the additional insureds, on the basis of a residential construction
exclusion in its policy.It also took
action to rescind the policy on the basis of the misrepresentation.

As
it related to rescission, the intermediate appellate court held that a policy
could not be rescinded to the detriment of innocent additional insureds.The appellate court relied primarily on the
decisions in Lufthansa Cargo, AG v New
York Mar. & Gen. Ins. Co., 834 N.Y.S.2d 659 (1st Dep’t 2007) and BMW Fin. Servs. v Hassan, 710 N.Y.S.2d
607 (2nd Dep’t 2000), lv denied 717
N.Y.S.2d 547 (2000), both of which addressed rescission to the detriment of an
additional insured.In BMW, the named insureds under an auto
liability policy represented that they would be the primary drivers of a
vehicle and that their children would be additional drivers, when in fact, the
children were the primary drivers.The
court held that this misrepresentation should not operate to the detriment of
BMW, named as an additional insured under the policy.Likewise, in Lufthansa, the named insured represented that a certain employee
would not be operating an insured truck, but it was that very same excluded
driver that was operating the insured truck at the time of an accident.The court held that Lufthansa, as an innocent
additional insured, should not be affected by the named insured’s
misrepresentation.

The New
York Court of Appeals found BMW and Lufthansa distinguishable from the facts
before it.In both instances, the
misrepresentations did not go to the fundamental nature of the risk being
insured.More specifically, the
misrepresentations in those cases did not “deprive the insurer of knowledge of
or the opportunity to evaluate the risks for which it was later asked to
provide coverage — i.e., the risk of damages arising from automobile theft (BMW) and accident (Lufthansa).” Such misrepresentations were materially different than
the named insured misrepresenting the entire nature of the risk to be insured, i.e., drywall installation as
opposed to exterior building work employing the use of tower cranes.As the court observed, “Admiral evaluated the
risk of, and collected a premium for, providing excess insurance for interior
drywall installation, not the obviously much greater risk presented by exterior
construction work with a tower crane at a height many stories above grade.”

Ultimately,
the Court of Appeals held that the innocent “additional insured” decisions in BMW and Lufthansa, and the decisions on which those two cases were based,
cannot have the effect of allowing coverage for an additional insured on a
policy that is deemed never to have existed as a result of rescission.

Thursday, June 7, 2012

In
its recent decision in Federal Ins. Co.
v. Sandusky, 2012 U.S. Dist. LEXIS 76880 (M.D. Pa. June 4, 2012), the
United States District Court for the Middle District of Pennsylvania had
occasion to consider whether a D&O insurer was required to defend an
employee of the insured in connection with underlying criminal and civil
matters arising out of alleged molestation of children.

Federal
Insurance Company issued a directors and officers and employment practices
policy to The Second Mile, a charitable organization founded in part by Gerry
Sandusky, who has received great notoriety for having allegedly molested
numerous children both during and after his time as a coach for the Penn State
football team.Following a grand jury
investigation, Sandusky was charged with forty criminal counts, including
sexual assault and unlawful contact with a minor.Sandusky and The Second Mile were also named
as defendants in a civil suit filed in Pennsylvania.Sandusky sought coverage under the Federal
policy, and Federal advanced Sandusky’s criminal attorney $125,000 in legal
fees, subject to a reservation of rights.Federal thereafter filed a declaratory judgment action.

Federal
agreed that Sandusky qualified as an insured person under the policy.It nevertheless sought a declaration that Sandusky
was not entitled to coverage for the underlying criminal and civil matters
because he was not acting in an insured capacity as an employee or executive of
The Second Mile when he committed the alleged acts.Federal also contended that the policy’s
D&O coverage excluded bodily injury, willful statutory violations and
sexual harassment.Prior to commencing
discovery, however, Federal moved for judgment on the pleadings, arguing that
“were The Second Mile’s insurance policy ultimately interpreted to cover losses
stemming from the allegations of sexual abuse and molestation of minors, the
insurance policy would be void as against Pennsylvania’s public policy.”Thus, before addressing the coverage issues
stemming from the policy, Federal sought a judgment based solely on public
policy grounds.

The
court acknowledged that “[s]exual abuse and molestation of children are ‘so
obviously … against the public health, safety, morals or welfare that there is
a virtual unanimity of opinion with regard to it.” This unanimity of opinion, explained the
court, is reflected in numerous Pennsylvania laws concerning the safety of
children.The court further observed
that “public policy bars enforcement of insurance contracts that indemnify
insured persons for damages arising from reprehensible conduct.”Given these factors, the court determined
that Pennsylvania would deem unenforceable, as a matter of law, any contract
indemnifying the perpetrator of intentional sexual molestation of
children.As the court explained:

Such a contract would allow an insured to shift the
consequences of intentional, reprehensible conduct to an insurance company,
thereby abdicating personal responsibility. It is entirely clear, and this
Court holds, that the public policy of Pennsylvania as announced by its courts
prohibits the reimbursement of Sandusky for any damage award that he may ultimately
be found to owe arising from the allegations that he molested and sexually
abused children.

While
the court concluded that Sandusky was not entitled to indemnification for the
alleged conduct, it nevertheless struggled with the issue of whether he was entitled
to a defense.The court noted that the issue
of whether providing a defense in a sexual molestation case violates public
policy was one of first impression under Pennsylvania law.The court acknowledged that general rule that
there can be no duty to defend allegations that are not potentially covered,
but explained that “where, as here, an insurance policy specifically includes
defense costs as covered loss, separate and apart from damages, the mechanical
process of determining whether there could be coverage for damages in order to
determine whether there is a duty to defend cannot be applied.”

Ultimately,
the court avoided ruling on the issue of defense costs, explaining that
“[w]ithout the benefit of a factual record, it is not entirely clear that
Pennsylvania's public policy would prohibit enforcement of the insurance policy
to the extent that it provides Sandusky with defense costs.”The court specifically concluded that further
development of facts through discovery could bear on the issue of the court’s
public policy determination, such as whether Sandusky himself purchased the
Federal policy and did so knowing that criminal charges were imminent.